Power & Politics Hub

This is the third article in this blog’s series about Mario Draghi’s report on Europe’s competitiveness. You can see the first article on Europe’s energy sector here and the second article on the critical raw materials sector here. This third article will focus on the automotive sector.

The report starts off by noting that the automotive sector has traditionally been one of Europe’s most significant “industrial engines”, however currently demand is shifting towards third markets and towards newer technologies- developments which have led to the automotive supply chain in the EU lacking in competitiveness both in terms of cost and technology. It is well known that recently demand has been growing in markets such as China, due to improving economic conditions and the geographical shift regarding global economic activity. In the EU, in comparison, the demand for cars has been much less dynamic. It is essential to remember that vehicles tend to be produced close to customer markets for reasons such as avoiding trade and regulatory barriers, and benefiting from lower transportation costs. While Europeans need cars increasingly less due to developed public transit, this still causes problems as the automotive sector has important upstream and downstream economic linkages. The sector is an important source of demand for upstream industries such as metals, chemicals and textiles, as well as for downstream sectors including repair and mobility services.

The fast-moving context of shifting demand and value chain reconfiguration already shows that the EU automotive sector’s competitiveness is eroding. On page 144, the report provides a figure showing the decline of production of cars in the EU, and the increase in China over the last two decades. Even in recent years the decline has been noticeable. In 2017, the EU exported around 7.45 million vehicles abroad, compared with 6.26 million in 2022. 

As far as production of EVs is concerned, China has moved a lot faster and at a larger, better coordinated scale across the entire EV value chain than the EU. As a result, China now enjoys lower costs and a technological edge. The report also notes that the USA has been faster than the EU to react to China’s advances, by issuing large stimulus (e.g IRA) and some trade barriers. 

The report predicts that the EU may start losing ground at an even faster pace. In the five years from now, more than another 10% of EU automotive production may be displaced.

Evidently, the report advocates that there should be two main objectives for the EU going forward- in the short term avoiding the radical displacement of the EU’s automotive sector, and in the medium term re-establishing a competitive leading position for the EU in the newer generation of cars.

The EU needs to ensure its automotive sector produces and supplies vehicles that are suitable and affordable for internal consumption as well as for export markets, across different segments. 

One action that the report proposes is taken in this context is developing an EU industrial action plan for the automotive sector, which would increase coordination both vertically and horizontally in the value chain. Draghi argues that with the convergence of multiple value chains (EVs, digital, mobility and circularity) a comprehensive approach is needed covering all stages- from R&D, through mining, to data sharing, manufacturing and recycling. 

Another important action, according to Draghi, is ensuring regulatory coherence, predictability and appropriate timing. Also it is essential that prior and detailed consultation takes place before introducing new regulation. The report also mentions reporting requirements and how they need to be specific and proportionate to the goal that is being pursued.

Draghi is also in favour of encouraging standardisation. He notes that common standards are essential to benefit from economies of scale and connectivity in the Single Market. This may also lead to creating exemplary standards with a global range. Draghi argues that standard setting should involve different stakeholders at different stages, including industry, scientists and relevant NGOs. Recycling and new technologies like cybersecurity systems and programming languages are only two examples of areas where the EU automotive sector would greatly benefit from standardisation.